Maker’s EDSR: How has it been and what’s next?
A week after EDSR's launch, $DAI in the DSR has quadrupled. Notable depositors include Justin Sun, Olympus DAO, and the “7 Siblings Recursive Farmer”, with each contributing at least 9% of the TVL individually.
This initiative has boosted the $DAI supply by $1B within a week, marking a 20% increase and pushing the protocol past half of its 10B $DAI target.
The System Surplus buffer has decreased by $20M this week, mainly due to EDSR payouts. Even when considering the nearly $23M off-chain surplus, it is projected to fall below $50M within a week.
Once this happens, the Smart Burn Engine, responsible for the $MKR buyback and burn, will be paused. This scenario could lead to FLOP auctions, in which case the protocol mints $MKR to cover bad debt whenever such an event occurs, posing a dilution risk for $MKR holders
As TVL in the DSR increases, more protocol revenue from the System Surplus will continue to flow out to farmers. Consequently, Maker's profit projection has sharply dropped from $84.9M to $11.1M. This downtrend is expected to continue while the EDSR is active
With the utilization rate surpassing 25%, the EDSR is set to decrease to 5.6% according to its pilot proposal.
However, after observing user behavior post-implementation, it became evident that it was predominantly $ETH / $stETH whales and arbitrageurs that benefited from the low borrow rates. This overshadowed regular $DAI users, who were the intended targets of the EDSR initiative.
To address this behavior, MakerDAO's founder, Rune, suggests aligning borrow rates with the EDSR, excluding ETH - A, B and C vaults due to their lower capital efficiency.
He has also proposed a revised yield structure:
5% for 0-35% utilization
4.15% for 35-50% utilization
To counterbalance the reduced DSR rates and increased borrowing rates, Rune introduced an $SPK pre-farming airdrop for Spark Protocol borrowers. This strategy is aimed at retaining speculative capital and encouraging regular $DAI users, with the goal of attracting as much TVL as possible and further bolstering market trust in the protocol, and reinforcing its Lindy effect.
With upcoming revisions to the EDSR parameters, the program's costs will be optimized for better efficiency. We will be watching closely how much of the current TVL will stay following these updates.